Energy Report Claims Vast Cheating of State
Energy Report Claims Vast Cheating of State
Evidence to Feds Cites $7.5 Billion in Overcharges
Mark Martin, Christian Berthelsen
San Francisco Chronicle
Saturday 01 March 2003
A report to be delivered to federal energy regulators Monday will provide new and extensive evidence backing up claims that a wide range of power companies manipulated California's energy markets and reaped at least $7. 5 billion in unfair profits, sources told The Chronicle.
Compiled by a team of California lawyers who have had unprecedented access to internal company records for the last three months, the report will show that power traders used Enron-style manipulation strategies to gouge the state during the energy crisis. Costs to the state's consumers also soared because power plants were deliberately idled to drive up prices, according to the report, which will be filed with the Federal Energy Regulatory Commission.
Sources said the evidence backs up many claims California officials have made since the beginning of the energy crisis, which caused blackouts throughout the state in 2000 and 2001 and led to record-high rate increases that Californians are still paying.
It may provide a strong rebuttal to a FERC judge's ruling in December that the state actually owed money to generators over unpaid bills stemming from the crisis.
The federal commission will consider the judge's ruling, the state's report and rebuttals from power companies when it makes a final ruling on California's claim that it is owed billions in refunds. That decision could come as early as this month.
BENDING, BREAKING RULES
New evidence will show that companies took advantage of tight energy supplies and a disastrously designed market to bend and break rules to bolster profits, a source who is familiar with the state's report said.
"The market misconduct was widespread. It involved most participants in the California energy market," the source said.
The new evidence has been amassed during a special discovery period granted by FERC that has allowed lawyers from three state agencies and two utilities to depose power company officials, listen to tape-recorded conversations among energy traders and pore over thousands of pages of company documents. The team, among other things, has questioned employees of big power companies like Reliant Resources and Mirant Corp., subpoenaed information from a Montana utility and interviewed officials with the Los Angeles Department of Water and Power.
All of that will be submitted Monday in what may be California's last chance to convince FERC that a primary cause of the state's power woes was unscrupulous corporate behavior.
Among the discoveries:
-- Internal memos from several companies show power traders developed complicated trading strategies that resemble some of the schemes Enron used in California. In separate proceedings, two Enron traders have pleaded guilty in federal court to wire fraud over the company's colorfully named market games like "Death Star" and "Get Shorty." Several strategies involved zapping megawatts around the West Coast to create transmission congestion -- or the appearance of congestion -- and volatility in the marketplace, driving up prices.
Some companies partnered with municipal utilities within California on the gaming strategies, the report shows.
-- Electricity generators purposely shut down power plants in California to take advantage of shortages and earn more money selling alternative megawatts. Two companies -- Reliant Resources and Williams Cos. -- have been forced to turn over money after tape recordings revealed power plant operators and traders discussing turning off plants to boost profits, and a source said the state had uncovered other examples similar to cases brought against Reliant and Williams.
-- Energy market manipulation between May 2000 and June 2001 allowed power companies to earn more than $7.5 billion in profits they wouldn't have seen under fair market conditions.
-- For at least part of the crisis, market manipulation led to energy prices that were double what they should have been, according to one source. From May to October 2000, the average price California paid for power was $100 per megawatt hour, when fair market conditions should have had power going for $50.
The report, due to FERC on Monday, will not be made public unless the commission decides to reverse a protective order. Sources familiar with the report refused to name which companies are accused of wrongdoing.
Some of the biggest energy providers in California continued to insist Friday that they had behaved properly during the crisis.
"We look forward to seeing what they file," said Duke Energy's Pat Mullen. "We have and always will operate within the market rules."
Most companies, including Duke, have told FERC they did not utilize the same schemes Enron employed in California. And several past attempts by the state to show a widespread effort to shut down power plants for profit have not provided definitive proof.
How FERC will handle the new report remains to be seen.
Generators will have until March 20 to submit rebuttals to the state's case.
The commission's first meeting after that date is March 26, and a FERC spokesman said there could be some decision on the refund issue then or at meetings in April.
In a preliminary decision in December, a FERC judge concluded that California had been overcharged by $1.8 billion between October 2000 and June 2001. But the judge also ruled the state owed energy companies $3 billion.
The ruling was a stunning blow to Gov. Gray Davis, who has said the state is owed about $8.9 billion for unjust prices between January 2000 and June 2001.
The judge's decision did not take into account market manipulation, however, and dealt with a narrower time frame.
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